How does macroeconomic uncertainty influence energy futures?: Evidence from extraordinary events

Abstract

This study examines the influence of macroeconomic uncertainty caused by extraordinary events on the Chinese energy futures market. Using a model that disaggregates macro and market effects using publicly available data, we delineate two distinct pathways through which macroeconomic uncertainty impacts energy futures prices and quantify the influence exerted by each channel. Our analysis reveals that macroeconomic uncertainty, when transmitted through macro effects, negatively impacts the price dynamics of energy futures. Conversely, the effect of macroeconomic uncertainty transmitted through market-specific mechanisms on energy futures prices varies depending on the source of uncertainty. The net effect is a result of the interplay between the two channels. The effects observed in energy futures are markedly different from those observed in other futures categories. A placebo test confirm that our findings are not driven by random fluctuations or daily price variations but are, in fact, due to macroeconomic uncertainty. Our results remain robust even when more granular classifications of energy futures are considered. Our conclusions provide significant insights for policymakers and market participants in risk management and enhance understanding of the mechanisms underpinning energy futures pricing.